English Abstract: Can a bank create money out of nothing? If so, how and how much a bank create money? While this issue has not been settled, academic and practical interest on the issue has been revived after Global Financial Crisis. Three theories are identified in the literature. Credit creation theory maintains that each individual bank is capable of creating money out of thin air, while financial intermediation theory models banks as mere financial intermediaries, collecting deposits that are to be lent out. Fractional reserve theory argues that each individual bank cannot create money but the banking system collectively can. The question of which of the theories is adopted has important implications for understanding monetary policy and banking system. We examine the historical backgrounds and arguments of three theories and present empirical evidence. We also discuss the implications of credit creation theory for unconventional monetary policy such as quantitative easing and financial regulations.

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